Section 111 of the Income-tax Act, 2025 — Carry Forward and Set Off of Loss from Capital Gains

In plain language

What Section 111 says in plain English

When you sell a capital asset — shares, mutual funds, property, gold, crypto (VDAs) — for less than what it cost you, you make a capital loss. Section 111 of the Income-tax Act, 2025 is the rule that lets you keep such a loss alive and use it to reduce future capital-gains tax when you finally book a profit. It is the direct successor to Section 74 of the old Income-tax Act, 1961, and it applies from the tax year beginning 1 April 2026 (i.e. FY 2026-27, AY 2027-28 onwards under the old naming).

The idea is simple and fair: the government taxes your capital gains, so it also allows your capital losses to be adjusted — first within the same year, and if any loss is left over, it can be carried forward for up to eight future years.

The two-step mechanism: set off, then carry forward

• Step 1 — Same-year set off (Section 108): In the year the loss arises, it is first adjusted against other capital gains of that same year under Section 108 (the intra-head set-off rule). Capital losses can only ever be set off against capital gains — never against salary, house property, business income or interest income.
• Step 2 — Carry forward (Section 111): Whatever loss cannot be fully absorbed in the current year is carried forward to the next year and set off against future capital gains, following the short-term / long-term rules below.

The golden rule — short-term vs long-term

• Short-term capital loss (STCL): can be set off against any capital gain — both short-term capital gains (STCG) and long-term capital gains (LTCG). It is the more flexible of the two.
• Long-term capital loss (LTCL): can be set off only against long-term capital gains (LTCG). It can never be used against short-term gains.

An easy way to remember it: short-term is a wildcard; long-term is fussy.

Key conditions and limits

• Eight-year cap: A loss can be carried forward for a maximum of eight tax years immediately following the year in which it was first computed. If it is still unused after eight years, it lapses permanently.
• File your return on time: To carry forward a capital loss, you must file your income-tax return on or before the due date under Section 263(1) (the 2025 Act's equivalent of Section 139(1) of the old law). A belated return means you lose the right to carry the loss forward — though you can still claim same-year set-off.
• Character is preserved: A carried-forward LTCL remains long-term in future years; a carried-forward STCL remains short-term. The loss does not change nature over time.
• No inter-head relief: Capital losses stay inside the capital-gains head. You cannot reduce your salary or business profit with a share-market loss.

How it interacts with other sections

Section 111 does not work alone. Section 108 handles the current-year intra-head set-off before anything is carried forward. The rates at which the surviving gains are eventually taxed are governed by Section 112 (STCG on listed securities, currently 20%) and the LTCG provisions (currently 12.5% without indexation on most assets). Filing timelines flow from Section 263. For losses that were already sitting on your books before 1 April 2026, Section 536(2) of the 2025 Act contains transition rules that expressly protect them — your old brought-forward capital losses continue to be carried forward and set off under the new Act.

Practical implications for taxpayers

• Tax-loss harvesting: Investors often sell a loss-making holding before 31 March to book a capital loss, use it against gains, and reduce the tax bill — a legitimate planning tool.
• Don't lose the benefit by filing late: Even if you have no tax to pay, file the return before the due date so the loss can be carried forward.
• Track your losses year-wise: Because of the eight-year window, keep a running record so older losses are set off first before they expire.